The agreement, which is expected to be confirmed today, is likely to end French objections to a British proposal to lift the sanctions that were imposed by the UN in 1992. That, in turn, will remove the remaining obstacle to compensation payments over the Lockerbie bombing.

France had been pressing the Libyan leader to increase the $33 million compensation paid to families of the 170 victims of a UTA airliner that exploded over the desert in Niger 14 years ago.

President Chirac has spoken to Colonel Gaddafi twice over the past week to argue that the UTA compensation package should be brought into line with the $2.7 billion (£1.7 billion) that Libya has agreed to pay to relatives of the 270 victims of the 1988 Lockerbie bombing.

Britain has proposed ending sanctions against Libya in return for compensation over Lockerbie, but Paris said that it would use its UN Security Council veto to block the move unless the UTA offer was improved.

After at first dismissing the French argument, Colonel Gaddafi changed his tune last week and reopened talks over the UTA bombing. Six Libyans, including his brother-in-law, were convicted in absentia over the attack by a French court in 1999.

Last night, in a live speech on television to mark the 34th anniversary of the coup d’etat that brought him to power, he said: “The problem over the UTA case is over and the Lockerbie case is now behind us. We are opening a new page in our relations with the West.

“The Gadhafi charitable organisations have been dealing with the families (of the UTA victims) to reach an agreement and they have reached an agreement.”

The Libyan leader said that he had agreed to improve the compensation package over the UTA explosion to save the French Government from “further embarassment”.

Of the Lockerbie deal, Colonel Gaddafi said that Libya was compelled to pay the compensation so that sanctions against it could be lifted and its name removed from the list of countries sponsoring terrorism.

“Is it about money? What can we do with money? Is it not to defend our country? What matters to us is honour. We don’t care about money,” he said. “The case of Lockerbie is now behind our backs. The Libyans have displayed wisdom and courage as well as efficiency in conducting this strategic conflict.”

The French authorities last night refused to confirm the deal, but Maitre Francis Szpiner, a lawyer representing victims’ families, said: “The principle of an equitable and satisfactory compensation has been agreed. The amount of the compensation will be very very suitable.”

Mohammed al-Zouai, the Libyan Ambassador in London, said that the agreement had been finalised after M Chirac had telephoned Colonel Gaddafi yesterday. Libya is thought to have offered about $300,000 per family last week — a significant increase on the original payout — but may have increased the amount after M Chirac’s intervention.

If the deal is confirmed, Britain is likely to move swiftly to table its UN Security Council resolution that sanctions against Libya should be lifted.

Guillaume Denoix de Saint Marc, a spokesman for the families, refused to divulge the details of any deal. “We have spent a sleepless night and the entire day negotiating,” he said.

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